Millegan Creek Apartments Harvard Case Solution & Analysis

Millegan Creek Apartments Case Study Solution

Recommendations

After the deep analysis of the overall competition and real estate market in Austin, as well the analysis of JPI’s ability to fulfill its debt obligations under various scenarios, the bank is recommended to provide loan to JPI for its apartment project. The project is expected to be quite successful on the basis of location, pricing and products offered. Along with it, the company is capable of generating positive cash flows except in one sensitivity scenario. Austin is also a great opportunity for real estate business due to increase in employment rate and population growth. On the basis of these factors the bank is recommended to grant loan to JPI.

However,the bank should set terms and conditions of the project which benefit the bank and the company both and reduces the default risk. It should set an average interest rate of 8%, as the company would be quite profitable even at the higher interest rates. It should set an average interest coverage ratio in between 1.25 and 1.1.

Conclusion

Indeed, the project would be a great success for the Bank as it is a large fiancé opportunity for the Bank on the basis of the increasing Austin employment and population growth, the viability of the location and the presence of giant companies across the area. Along with it, the ability of the company to pay its debt service under various scenarios except declining rental income shows the feasibility of the project. Therefore on the basis of above analysis the bank is recommended to finance the loan to JPI.

 

Exhibits

Exhibit A: Sensitivity Analysis

Proforma Cash Flow Statement (Senstivity Analysis)
NormalSensitivity Analysis
Decrease in Rent IncomeIncrease in Operating Expenses
Rental Income (336,094 sf @ $ .83/psf per month)a3,344,69728621093344697
Other income
Garages (160 @ $75/month)144,000144,000144,000
Carports (98 @ $20/month)23,52023,52023,520
Other ($9/unit/month)42,33642,33642,336
Total potential gross revenue$3,554,5532862109$3,554,553
General vacancy (7%)$ (248,819)$ (248,819)$ (248,819)
Effective gross revenue$3,305,73426132903305734
Operating expenses
Administrative$ 26,888$ 26,88829577
Repairs/maintenance134,438134,438147882
Marketing40,33140,33144364
Salaries255,431255,431280974
Utilities107,550107,550118305
Taxes477,253477,253524978
Insurance33,60933,60936970
Management134,438134,438147882
Total operating expenses$1,209,938$1,209,9381330932
Cash flow from operations$2,095,79614033521974802
Leasing & capital costs
Structural reserve$ 33,609$ 33,609$ 33,609
Replacement reserve78,00078,00078,000
Total expenses$1,321,54713215471442540.8
Cash flow before debt service$1,984,18712917431863193
Debt Service$1,440,85214408521440852
Cash Flow After Debt Service$543,335($149,109)$422,341

Exhibit B: Sensitivity Analysis Scenarios

Scenario 1: 
Decrease in Rental Income
Decrease in sf10%
Decrease in Rent Per month5%
Scenario 2:
Increase in Total Operating Expenses10%

Exhibit C: Increase in Interest Rate

Proforma Cash Flow Statement (Increase in Interest Rates)
Interest Rates
AgreedSenstivity Analysis
7.75%8%9%
Rental Income (336,094 sf @ $ .83/psf per month)a$3,344,697$3,344,697$3,344,697
Other income
Garages (160 @ $75/month)144,000144,000144,000
Carports (98 @ $20/month)23,52023,52023,520
Other ($9/unit/month)42,33642,33642,336
Total potential gross revenue$3,554,553$3,554,553$3,554,553
General vacancy (7%)$ (248,819)$ (248,819)$ (248,819)
Effective gross revenue$3,305,734$3,305,734$3,305,734
Operating expenses
Administrative$ 26,888$ 26,888$ 26,888
Repairs/maintenance134,438134,438134,438
Marketing40,33140,33140,331
Salaries255,431255,431255,431
Utilities107,550107,550107,550
Taxes477,253477,253477,253
Insurance33,60933,60933,609
Management134,438134,438134,438
Total operating expenses$1,209,938$1,209,938$1,209,938
Cash flow from operations$2,095,796$2,095,796$2,095,796
Leasing & capital costs
Structural reserve$ 33,609$ 33,609$ 33,609
Replacement reserve78,00078,00078,000
Total expenses$1,321,547$1,321,547$1,321,547
Cash flow before debt service$1,984,187$1,984,187$1,984,187
Debt Service$1,440,852$1,455,491$1,582,557
Cash Flow After Debt Service$543,335$528,696$401,630

Exhibit D: JPI 10% Cap Rate

JPI 10% Cap Rate

Total Cost of the Development (Exhibit 7)$19,644,000
NI After Interest$1,882,694
Cap Rate9.58%
NI at 10%1,964,400.00
Difference between Actual and Required81,706
Increase %4.34%

 

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